When trade policy turns contentious: Tariffs, currency devaluation, and other trade barriers

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Currency wall: The global stakes of trade disputes.

© kamui29/stock.adobe.com, © tortoon/stock.adobe.com; Photo illustration Encyclopædia Britannica, Inc

If you’ve ever studied economics or listened to a group of economists speak, you know how hard it is to get universal agreement. But one thing they generally agree on is that international trade, when structured properly, benefits all parties. Any barrier to free trade tends to shrink the overall economic pie.

And yet, trade barriers—including tariffs, subsidies, import quotas, currency devaluation, and other protectionist policies—are common among even the most free-market-friendly nations. Sometimes a protectionist policy (what 18th-century economist Adam Smith called a “beggar-thy-neighbour” policy) leads to a tit-for-tat response that devolves into an all-out trade war.

All nations want to act in their own best interest. What may be beneficial in the short term, however, might be detrimental over the long term, and vice versa. Sometimes a nation will put its own needs first, especially during a period of recession, war, or civil unrest. There are noneconomic considerations such as national security or the need to protect trade secrets. Sometimes a nation’s leadership promotes a trade policy that benefits certain political insiders, despite the aggregate cost.

Sometimes, nations can work out their differences through trade agreements and diplomacy. Other times, it takes a trade war—or the threat of one—to forge trade policy that benefits all.

Tariffs. Countries impose tariffs—taxes imposed on imported goods—to apply pressure on trading partners and encourage businesses to source goods from other nations. The ongoing trade war between the U.S. and China is a prime example. The U.S. has imposed tariffs on Chinese electronics, and China has responded with tariffs on U.S. soybeans and other agricultural products.

Currency devaluation. Countries use currency devaluation—actions taken by a government to weaken the value of its money—to make exports cheaper and imports more expensive. It’s often used in trade wars to counteract tariffs by keeping goods competitively priced. In 2019, for instance, China was accused of devaluing its yuan to offset U.S. tariffs. The tactic isn’t without its risks, including inflation and destabilizing global markets.

Beyond tariffs: Other trade barriers. Tariffs aren’t the only tools at a nation’s disposal to protect its economic interests. Countries use quotas to limit imports, subsidies to support domestic industries, and regulations to block foreign competition. Examples include the European Union’s agricultural subsidies that protect local farmers and China’s import restrictions that favor domestic producers. Such barriers are less obvious than tariffs, but can be just as disruptive and may further inflame trade tensions.

Embargoes and export restrictions. Embargoes, such as the 1973 Arab oil embargo that stopped shipments to the U.S. and several other Western nations, halt trade with certain countries to achieve political aims. Export restrictions, meanwhile, limit the sale of critical goods such as technology or raw materials. Both measures can devastate economies, disrupt supply chains, and increase tension among nations, making them powerful but risky tools in trade disputes. These trade barriers often provoke retaliatory action, escalating tensions between nations. 

How countries respond. When faced with trade barriers, countries often respond in kind by imposing counter-tariffs or export bans. Some nations form alliances to boost economic power, such as the European Union (which began in 1952 as a treaty governing the trade of coal and steel) or the United States–Mexico–Canada Agreement (USMCA). Others may challenge policies through international bodies like the World Trade Organization (WTO). These strategies can escalate disputes or pave the way for negotiation and resolution.

Consider two nations, Nation A and Nation B. Suppose the world economy is booming, and Nation A believes it’s a great time to build up its automobile manufacturing industry. It may choose to restrict auto imports temporarily, even though it will mean more expensive vehicles for its consumers in the short term, and will likely upset the auto industry in Nation B. But because the overall economy is booming, neither nation feels the pinch.

Now suppose, after a few years, the policy has worked so well that Nation A is able to begin exporting its vehicles to Nation B. At this point, the nations have a choice:

In extreme cases, a trade war can elicit a military response. For example, many economists and historians point to the Smoot-Hawley Tariff, which raised import duties to protect American farmers and businesses in the early days of the Great Depression, as not only exacerbating the global economic meltdown, but also contributing to the rise in extremism that culminated in World War II.

Trade wars, although often rooted in specific economic or political goals, tend to have consequences that extend far beyond the initial disputes. They disrupt global supply chains, raise prices for consumers, and can lead to prolonged periods of economic stagnation or even conflict. Favorable agreements may result, but the overall costs often outweigh the benefits.

The lessons from history are clear: Although nations must protect their interests, long-term economic stability and growth are best achieved through cooperation and open markets. Trade barriers might address short-term goals, but when they escalate into trade wars, the economic pie tends to shrink for everyone involved—leaving no true winners.

Despite the prevalence of trade barriers, the international community has long recognized the benefits of reducing them. Efforts by the WTO and its predecessor, the General Agreement on Tariffs and Trade (GATT), aim to promote free trade and resolve disputes peacefully. Although not perfect, these frameworks have helped lower global tariffs, foster economic growth, and prevent trade conflicts from escalating into larger crises.